FINANCE & ECONOMY

Thursday

30

November , 2017

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India’s advancement by 30 points to 100th in ease of doing business (EDB) rankings has been considered a good achievement by many. The lower the ranking the better is its position. A section of observers think that this will pave the way for higher investment in the economy. This is particularly important at a time when a continuing drought situation in new investment in the economy has been a cause of concern. The World Bank started ranking in EDB in different economies of the world since 2003. Moody’s better rating of Indian Economy has also considered EDB’s better ranking. At that time only 133 countries were included. But in the present ranking in 2018 as many as 190 countries are included. There are 10 heads on which the ranking is based. These are 1) starting a business 2) dealing with construction permits 3) getting electricity 4) registering property 5) getting credit 6) protecting minority interest 7) paying taxes 8) trading across borders 9) enforcing contracts 10) revolving insolvency. There is another head, that is, labour aspect which has been kept out of computing.

Some methodological criteria for measuring EDB

The method of computation is changing. Therefore a debate arises regarding comparison between before 2015 ranking and after that.

For measuring EDB, the questionnaires are given to targeted enterprises and professionals and sometimes surprisingly to government persons. The questions mainly are attribute types. That is not purely objective in nature and hencethere is always a chance of involving personal (may bebiased) value judgment. Some observers do not care for the ranking as it depends on the number of the countries included in the survey and the performance of reforms they take indue course. Therefore ranking does not reveal the actual need of doing business.

It is known that in most cases the sample of choosing respon-dents is not very large. So it may not represent the population properly. It is also known that in the present computation more than 50% of economies have more than six respondents, 35% have 3-5 only and 14 have 1 or 2 respondents.

The survey of EDB is done in some selected parts of the country and most of the places are kept out of the purview of ranking. In the case of India the present EDB survey has been done only in Mumbai and Delhi. Therefore it is possible the real situation is misrepresented.

How really the better ranking in EDB helps an economy

There are many aspects which the EDB does not consider to assess the ranking. It does not measure all aspects of the business such as the macroeconomic conditions, the level of employment, corruption, political stability, income inequality. The status of the finances of the government is not considered either. It does not take into account the other types of regulation such as financial market, the environment, and intellectual regulations. These are all matters of concern for every entrepreneur to continue a business.

The EDB does not consider complete assessment of competitiveness and the business environment of a country. In practice it has been observed that Russia has been much ahead in EDB ranking than China. But in many popular respects like growth rate, FBI inflow, China is in a much better position. One can think of India. In the last two years, that is, in FY16 and FY17 considerable amounts, USD60 and USD70 respectively, of FDI came to India when the EDB ranking was lower. But in this 2018, when India ranks better both investment and inflow of FDI are lowered. Why was it so? There can be several reasons. But the role of ranking is not of prime importance.

Other indicators should be considered carefully

Out of 10 indicators India has improved its rank to 103rd from 135th in resolving insolvency. Another good improvement in indicators has been in payingtaxes, protecting minority investors, getting electricity, enforcing contracts. But there are some other indicators like starting a business, construction permits, trading across borders, India has to go miles to be ranked better. Indicators should be like starting a business and registering property where India slipped its position.

Conclusion

There is a role of EDB rankings as it is related to the cost of business. But investment in most cases does not care for that to a great extent. This is why, China is far ahead of any countries in growth of investment and inflow of FDI in spite of being a back bencher in EDB ranking. Investment, many times, is a product of “animal spirits”, not totally backed by strong financial logic. The coming prospective yields from aninvestment are the dominant cause of new investment. The World Bank’s EDB cannot establish very direct correspondence to investment in business. Surprisingly when India has been ranked better in EDB it is no reflection on the business atmosphere. Soone should be careful to be too much dependent on EDB.